Basic HTML Version
50
I
Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
The next highest fee pool is found when a hedge fund manager
is approached by an existing or prospective investor to manage
long-only money on a private basis. This most typically occurs
with managers in the directional category running long/short
funds at 50%-60% net long. These managers tend to have
a perceived sector or market expertise that is desired for the
investor’s long- only portfolio where they see the hedge fund
manager as being better qualified to pursue that opportunity
than a traditional long-only manager. These private funds are
set up as custom fund of one vehicles or separately managed
accounts. Fees for this long-only product were cited as being
lower than the core hedge fund, but still substantially higher
than traditional long-only offerings. A 1%management fee and
10% incentive fee were commonly mentioned arrangements
for these vehicles.
As hedge fund managers begin to consider regulated product,
the trade-off flips with the size of the assets, and not the fees
providing the incentive. Regulated alternative funds are unable
to charge incentive fees in most instances, but these offerings
are attracting substantial flows and managers can still charge
a management fee on this money. These products are found
across both the UCITS structures and in vehicles that fall
under the US Investment Company Act of 1940 and are thus
referred to in the vernacular as “40 Act” funds. There are both
single fund offerings and fund of fund offerings being created
in this category.
“ We’ve seen quite a few hedge funds interested in long only.
Some of them are very well established funds whose AUM is
up there and there’s not as much opportunity on the short
side. They can continue to work and grow the long side of
their books,”
– Endowment
“ I think that there are a lot of people on the hedge fund side
looking to have more directional, lower fee product. These
are people we think highly of. Their flagship funds can’t
really take on more capacity,”
– US Corporate Pension
BETA
STRATEGIES
Custom Long
Mandates via
SMA Based
on Core Strategy
Unconstrained
Long Regulated
Funds
ALPHA
STRATEGIES
New
“Cash + Alpha”
PE Like Products
Regulated
Alternatives:
40 Act & UCITS
RETAIL AUDIENCE
INSTITUTIONAL &
HNW AUDIENCE
FEE POTENTIAL
LOW
HIGH
SIZE OF POTENTIAL ASSET POOL
LOW
HIGH
Source: Citi Prime Finance
Chart 28: Hedge Fund Product Development Opportunities & Trade Offs